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Why are parts of our Roth IRA conversions showing taxable?

Calendar year 2016 was the first year that I was not covered by a retirement plan at work since I retired in 2015.  In calendar year 2016 my wife and I initially contributed $2,000 each to traditional IRAs and then almost immediately converted the funds to Roth IRAs as we weren’t sure at the time that we would have enough earned income for us both to make the full contributions and conversions.  Now in early 2017, as we are preparing our taxes, we realize that we can contribute the full amount.  We do not want to make the contributions deductible for a number of reasons including wanting to convert the remaining $4,500 funds to Roths, so when Turbotax asked what portion we wanted non deductible we each selected $6,500.  As an aside we have no other traditional IRA assets either deductible or non deductible. The non deductibles were converted to Roth IRAs in the years we made the non deductible contributions.

 

So here’s the issue, when we indicated in the Turbotax interview that the remaining $4,500/person is to be contributed between January 1, 2017 and April 18, 2017, line 4, of form 8606 shows $4,500 which makes sense.  However, for line 5 (subtraction of line 4 from 3) shows $2,000.  When you work your way through the form the $2,000 ends up being non taxable and the $4,500 taxable.  Why isn’t all $6,500 non taxable if we each intend to convert the non deductible (self selected) $4,500/each to Roth IRAs by April 18th?  Why do we end up with a $4,500 basis on funds that are non deductible and converted to Roths?  In previous years when we did backdoor Roth conversions nothing was taxable and no bases were created.  Finally, we modified the existing 1099-Rs to show $6,500 in boxes 1 & 2A of our 1099-Rs.  When we eventually add the new 1099-R’s showing $4,500 each we back down the originals to $2,000.


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Highlighted
Level 15

Why are parts of our Roth IRA conversions showing taxable?

You cannot call the $4500 of contributions you made in 2017 a 2016 conversion.  Only $2000 was converted in tax year 2016. The other $4500 will go on your 2017 return as a Roth conversion

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13 Replies
Highlighted
Level 15

Why are parts of our Roth IRA conversions showing taxable?

You cannot call the $4500 of contributions you made in 2017 a 2016 conversion.  Only $2000 was converted in tax year 2016. The other $4500 will go on your 2017 return as a Roth conversion

View solution in original post

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New Member

Why are parts of our Roth IRA conversions showing taxable?

Thanks Hal_Al. It doesn't seem consistent that 2016 IRA contributions can be made until April 18, 2017 but conversions made after December 31st but before April 18th are not 2016 conversions. Shouldn't they go hand in hand?
Highlighted
Level 15

Why are parts of our Roth IRA conversions showing taxable?

No.  A Roth conversion is an entirely separate transaction.  It's only the misnomer of "backdoor Roth contribution" that seems to tie these together.  A Roth conversion involves a distribution from the traditional IRA and (with the exception of certain returns of contributions) distributions are always reportable on the tax return for the year in which the distribution occurs.
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Level 15

Why are parts of our Roth IRA conversions showing taxable?

Also, basis in nondeductible traditional IRA contributions becomes available to be applied to a distribution in the year in which the basis was contributed.  For a contribution made for the prior year, that's the year after the year for which the contribution is made.
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New Member

Why are parts of our Roth IRA conversions showing taxable?

Thanks for all the help.  We are now running an alternate scenario where we make only the original $2,000 / each traditional IRA contribution that we declared non deductible and back door converted to Roths in calendar year 2016 the only non deductible contribution for 2016.  The remaining $4,500 / each that we will contribute before the April 18, 2017 deadline for 2016 we will elect as deductible for a total of $9,000 in deductible IRA contributions for 2016.  I may be thick, but why does this result in the original $2,000 / each being TAXABLE Roth conversions?  We each declared the $2,000 non deductible and had no other IRA assets when we converted them to Roths in calendar year 2016.
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Level 15

Why are parts of our Roth IRA conversions showing taxable?

"why does this result in the original $2,000 / each being TAXABLE Roth conversions?"

It doesn't.  Make sure that when you enter the total of $6,500 each as your contributions for 2016 you also indicate that $4,500 of that was contributed between January 1 and April 18, 2017.  Also make sure that you are not including the $4,500 when you tell TurboTax your year-end balance in traditional IRAs (which should be zero if you expect your entire $2,000 of basis to be applied to your Roth conversion).
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New Member

Why are parts of our Roth IRA conversions showing taxable?

dmertz, I believe I had already done what you suggested and I still have the issue.  The IRA Information Worksheet shows $2,000 on line 3 but this should be zero as I converted this money to a Roth in calendar year 2016, right?  The source of line 3 says it's Form 8606 line 14. which indicates a basis of $2,000 in traditional IRAs for 2016 and earlier years.  However. that calculation relies on line 4 being correct and it shows $2,000 having been contributed between January 1, 2017 and April 18, 2017.  This is not correct and if I try and override this value to zero then TurboTax gets all hot and bothered indicating an error in the final review.  Something about not being able to override that line as it's used for an internal check for electronic filing.  Going back to fix it in the interview is problematic as it feels like not all interview questions are re-raised if I choose to revisit the topic, but the points you raised I believe are entered correctly.  Given my situation, can you tell me what each line should show on the relevant worksheets & forms?
Highlighted
Level 15

Why are parts of our Roth IRA conversions showing taxable?

Well, I just learned something; my previous suggestion that TurboTax would automatically treat the nondeductible portion as coming from the portion contributed before year-end was wrong.  In reviewing Form 8606 lines 1 though 4 in TurboTax, I now see that TurboTax automatically treats that portion contributed *last* as the nondeductible portion of your contribution.  This means that TurboTax's programming treats your conversion as taxable and carries your $2000 of basis over to 2017.

However, the instructions for line 4 of Form 8606 say:

"If you made contributions to traditional IRAs for 2016 in 2016 and 2017 and you have both deductible and nondeductible contributions, you can choose to treat the contributions made in 2016 first as nondeductible contributions and then as deductible contributions, or vice versa."

To force TurboTax to treat this the way you desire, I need to modify my previous instruction.  You must indicate that NONE of your contribution was made between January 1 and April 18, 2017.  This will result in Form 8606 line 4 showing zero (as permitted by the IRS) and your entire $2,000 of basis will be applied to your $2,000 Roth conversion.  Do not use overrides.

Thanks for the follow-up.  I learned something new about TurboTax.
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New Member

Why are parts of our Roth IRA conversions showing taxable?

I will do that, thanks.  As an aside do you log this defect with TurboTax so they can fix the programming to allow for the flexibility the instructions for line 4, form 8606 allow?
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Level 15

Why are parts of our Roth IRA conversions showing taxable?

I considered passing this along to the moderators, but this is such a rare case that I suspect that they would not consider it to be a defect since the tax return is not incorrect from the standpoint of the IRS.

There are a number of other items that I've reported that are much more common situations, some frequently mentioned on this forum, that Product Quality simply considers to be either unsupported calculations or situations that have an adequate workaround.  The more I think about it, the more it seems like I might have helped one other person in a situation similar to yours a few years ago.  Since this is the sort of question I look for to help out on this forum, I think I would have come across it more if it was a pervasive issue.
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New Member

Why are parts of our Roth IRA conversions showing taxable?

One last post for me dmertz (I hope).  If I choose to make all $6,500 non deductible and answer the interview to indicate that $4,500 was contributed between January 1, 2017 and April 18, 2017 form 8606 populates line 4 with the $4,500 amount.  However, regardless of whether I put zero or $4,500 on line 4 the result on line 14 (your total basis in traditional IRAs for 2016 and earlier yeas) shows $4,500.  The IRA Information Worksheet gets its line 3 from line 14 of form 8606 and of course it shows $4,500, but the line is labeled "basis carryover as of 12/31/2016".  But I had no balance in my traditional IRA on December 31st having converted the $2,000 to a Roth earlier in the year.  So here are my question(s):  1) how can I have a 12/31/16 basis under this scenario?  2) How will this supposed basis affect my 2017 taxes, if at all?  I know the contribution year is extended to the filing deadline while conversions are in what ever calendar year they're executed in, but what about basis in this case?  And finally, if I contribute the remaining $4,500 to a non deductible IRA before the filing deadline can I immediately do a Roth conversion without it being taxable in 2017?  I ask this given a potential basis entering tax year 2017.
Highlighted
Level 15

Why are parts of our Roth IRA conversions showing taxable?

"If I choose to make all $6,500 non deductible and answer the interview to indicate that $4,500 was contributed between January 1, 2017 and April 18, 2017 form 8606 populates line 4 with the $4,500 amount.  However, regardless of whether I put zero or $4,500 on line 4 the result on line 14 (your total basis in traditional IRAs for 2016 and earlier yeas) shows $4,500."

Right.  With only $2,000 of the $6,500 nondeductible contribution converted, you end up with the remaining $4,500 of basis transferring to 2017.

1)  You have basis from your nondeductible contributions for 2016 because the contribution was made for 2016.  However, any of the 2016 addition to basis that was the result of a contribution after 12/31/2016 is not basis that is available to apply to a 2016 distribution.

2)  The amount on 2016 Form 8606 line 14 will transfer to your 2017 Form 8606 line 2 to be used in calculating the taxable amount of any distribution or conversion you do in 2017.

3)  There is no requirement that you wait to do a Roth conversion.  Any basis that you add in 2017 as the result of a contribution for 2016 will be included on line 2 of your 2017 Form 8606 as I mentioned in 2) above.  Although you haven't asked about it, any basis that you add in 2017 as the result of a nondeductible contribution for 2017 will appear on line 1 (and will not be subtracted out on line 4).

(Don't refer to it as a nondeductible IRA.  You have basis in nondeductible contributions, not nondeductible IRAs.  Your basis applies across all of the traditional IRAs that you yourself own.)
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New Member

Why are parts of our Roth IRA conversions showing taxable?

I have it straight now.  Thanks so much for your help!